Metro real estate growth: 'smart, conservative, makes sense'

The Greater Des Moines commercial real estate market is nudging ahead during this slow economic recovery, with virtually every property sector showing improvement, according to an annual report released today by CBRE/Hubbell Commercial.

Kyle Gamble, managing director of CBRE/Hubbell Commercial, said the report reflects a steadily improving Greater Des Moines economy: One that doesn’t get ahead of itself.

“It’s smart. It’s conservative. It makes sense,” Gamble said.

The report takes note of an increased demand for apartments, and even with more than 2,000 units expected to be added to the inventory this year, there is little danger that Greater Des Moines is on the verge overbuilding.

Even the dogged office market, which has experienced a glut of vacant buildings, floors and rooms in recent years, has experienced a drop in inventory for the first time in the 16 years the report has been compiled. Some office properties are gaining tenants.

Some of that empty space has been repurposed with the conversion of office buildings to residential and retail properties. Other buildings are benefitting from an infusion of cash by new owners and aggressive marketing by brokers.

There even has been some return of speculative building, primarily in the industrial segment, he noted. However, that construction has not led to a glut of vacant warehouse bays.

“The fundamentals are in line with supply and demand in our market,” Gamble said.

The report tends to verify general impressions of the overall commercial real estate market and it provides hard data used by brokers, bankers and other investors. As one broker commented prior to the release of the Des Moines Metro Real Estate Market Survey, “I don’t get invited to the release event, but I read the report all year long.”

The real estate report is prepared for CBRE/Hubbell Commercial by Frandson & Associates LC. A separate apartment survey is prepared by Commercial Appraisers of Iowa Inc.

Here is a breakdown of findings by property category.

Office:

“The combination of increased leasing activity, conversion of some Class C buildings to residential and the repurposing of two vacant office buildings located in the (central business district) is positively impacting market fundamentals and breathing life and vitality into our market,” Jan Berg of CBRE/Hubbell Commercial said in a news release.

The office market occupancy rate remained relatively consistent this year, reaching 89 percent, which is a slight increase of 0.5 percent. Class A and B sectors experienced positive occupancy increases while Class C experienced an overall decline in occupancy of 2.6 percent.

The competitive office market, consisting of buildings considered to compete for tenants, has experienced a nearly 3 percent increase in occupancy and positive total absorption of 32,172 square feet.

Industrial:

“Contrary to a couple years ago, warehouse, distribution and manufacturing occupiers are pushing the demand for industrial space … lease rates are remaining stable with nominal rent reductions and concessions,” said CBRE/Hubbell Commercial’s Jon Ledinsky.

Occupancy of warehouse space in the Greater Des Moines market has steadily improved in the last three years, reaching its highest occupancy level since 2001 at 91.6 percent.

The occupancy of manufacturing space has been hovering above 95 percent for several years, sitting at 95.7 percent in 2013.

The industrial sector grew by 1.2 million square feet in the last year.

More than 1 million square feet of warehouse space was occupied in the last year, the largest amount absorbed since 2007.

The manufacturing sector also experienced a positive aggregate absorption of 450,000 square feet, the largest levels since the inception of this survey in 1998.

Growth in industrial space demand has come from warehouse and distribution occupiers as well as manufacturers related to the agribusiness and bio science industries.

Retail:

“Neighborhood centers, historically a laggard, have displayed improved occupancy for two straight years. However, landlords continue to offer incentives to help maintain occupancy, masking the true effects of the recent recession,” said CBRE/Hubbell Commercial’s Tyler Dingel.

The continuing redevelopment of Southridge Mall has resulted in new tenants, with more stores scheduled to open this year.

The neighborhood and community center category experienced increased occupancy for the second year in a row. After decreasing for eight consecutive years, occupancy rose to 77.3 percent in 2012 and to 78.9 percent this year.

The big box retail category continued its strong performance with a 96.7 percent occupancy rate.

Absorption of big box retail space was significant with 423,700 square feet absorbed during the past 12 months. A significant contributor was the addition of a 263,250-square-foot Fleet Farm store in Ankeny.

Multifamily housing:

“Currently, there is pent-up demand for apartment homes in our marketplace. While many young adults are choosing to live at home, as the economy improves, they will transition into apartment living,” said Rick Krause of CBRE/Hubbell Commercial.

The Des Moines apartment vacancy rate decreased from 5.3 percent in 2012 to 4.2 percent in 2013, reaching its lowest level since 1994.

The average vacancy rate for low-income housing tax credit projects decreased to 2.2 percent from 4.6 percent the prior year.

Rents have increased for all unit types over the past year. The increase in average rents ranged from 0.5 percent for three-bedroom units to 5.3 percent for one-bedroom units.

An estimated 1,809 market-rate and 320 tax-credit units will be added this year in Greater Des Moines.